SMU Inc. is considering two potential machines to produce their Mustang logo hats forever. The red machine has an equivalent annual cost of $75,000 per year. The blue machine would cost $100,000 to purchase, would cost $20,000 each year to maintain, and would last for 10 years. At the end of year 10, the blue machine could be sold for $10,000. Assume the appropriate discount rate is 10% and ignore taxes. What is the equivalent annual cost of the blue machine, and which machine should the company choose? $85,432... choose Blue Machine EAC blue machine Blue Machine EAC $82,390... choose red machine $35,647 ... choose Blue Machine EAC blue machine $15,783... choose Blue Machine EAC blue machine
SMU Inc. is considering two potential machines to produce their Mustang logo hats forever. The red machine has an equivalent annual cost of $75,000 per year. The blue machine would cost $100,000 to purchase, would cost $20,000 each year to maintain, and would last for 10 years. At the end of year 10, the blue machine could be sold for $10,000. Assume the appropriate discount rate is 10% and ignore taxes. What is the equivalent annual cost of the blue machine, and which machine should the company choose? $85,432... choose Blue Machine EAC blue machine Blue Machine EAC $82,390... choose red machine $35,647 ... choose Blue Machine EAC blue machine $15,783... choose Blue Machine EAC blue machine
Chapter10: Capital Budgeting: Decision Criteria And Real Option
Section: Chapter Questions
Problem 4P
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Please show all equations and work as needed. Make the correct answer clear. If possible, please type work so it can be copied. Thank you.
Transcribed Image Text:SMU Inc. is considering two potential machines
to produce their Mustang logo hats forever. The
red machine has an equivalent annual cost of
$75,000 per year. The blue machine would cost
$100,000 to purchase, would cost $20,000 each
year to maintain, and would last for 10 years. At
the end of year 10, the blue machine could be
sold for $10,000. Assume the appropriate
discount rate is 10% and ignore taxes. What is
the equivalent annual cost of the blue machine,
and which machine should the company
choose?
$85,432... choose
Blue Machine EAC
blue machine
Blue Machine EAC $82,390... choose
red machine
$35,647 ... choose
Blue Machine EAC
blue machine
$15,783... choose
Blue Machine EAC
blue machine
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